Are Investors Turning Away From Over-Hyped Floats?

The private equity owners of Merlin Entertainments, owner of the London Eye, sold more than planned in an IPO that priced near the top of its range, and then rose 10% in conditional trading.

Bloomberg News

Is the big rush for new initial public offerings in Europe putting some managers off?

After years of pent-up demand, two London-based investors told colleagues over at Financial News that they opted to avoid two recent flotations because of high levels of demand from other managers. They feared they wouldn’t get an allocation.

To be fair, these are only two examples, but various investors said IPO oversubscription last year resulted in their orders being scaled back to positions that were too small to include in their portfolios, if they received shares at all.

They added that some fund managers were placing outsize orders in an attempt to secure stock.

One investor said: “It’s a high risk thing to do. You could get caught out and you’ve got 50% of your fund in a single company.”

In last year’s biggest IPO, the privatization of U.K. postal operator Royal Mail, roughly 800 separate orders from institutional investors were placed, worth about 20 times the value of shares on offer. Only about 300 of those investors were allocated stock, a parliamentary committee into the flotation heard last November.

Chris White, fund manager at Premier Asset Management, said: “There should be a more equitable way of allocating shares in new issues, as quite often there isn’t any clarity over what the allocation process has been and that can be frustrating.”

“If everyone feels they’re going to be treated fairly you’re probably more likely to be interested in doing the work on a new company. Ultimately it can be very frustrating when you meet a company, you meet an analyst or two to talk about the company, you do your own analysis and assumptions and put in your application and get a small percentage of what you applied for or nothing at all,” Mr. White added.